One of the biggest catalysts that has boosted the market over the past year or so has been the emergence of artificial intelligence (AI). Companies and market observers alike agree that the potential for productivity gains could boost profits, benefiting both companies and shareholders. Investors are also waiting patiently for insight from the Federal Reserve on the future trajectory of interest rates and when the central bank might reverse course and start lowering rates.
Against this backdrop, AI software manufacturers C3.ai (NYSE:AI) Chip maker drops 5.2% intel (NASDAQ:INTC) Semiconductor specialist, down 5.2% Advanced Micro Devices (NASDAQ: AMD) Memory and storage solutions specialist down 4.2% micron technology (NASDAQ:MU) The foundry also fell by 3.9%. taiwan semiconductor manufacturing (NYSE:TSM) It was down 3.2% as of market close on Friday.
After checking all the usual suspects, such as regulatory filings, financial reports, and analyst price target changes, we uncovered some company-specific news that explains the share price decline (more on this here). (I will explain this in detail later). Many investors are keenly watching the economy and geopolitical conflicts.
Prospects for short-term interest rate cuts are dimming
Investors are eagerly awaiting the start of a series of rate cuts that would finally put an end to the ongoing fight to rein in inflation. However, recent reports indicate that the price hike is far from over.
The latest monthly report on inflation, courtesy of the U.S. Bureau of Labor Statistics, showed inflation to be surprisingly stubborn, sending ripples of anxiety across Wall Street. The consumer price index (CPI), which is the most closely watched indicator of inflation, rose 3.5% in March compared to the same month last year, but rose only 0.4% compared to the previous month.
This increase exceeded expectations. Economists had expected sales to rise 3.4% from a year earlier and 0.3% from the previous quarter. Before the report was released, investors had been hoping for the first of several rate cuts this year to take effect in June, but fears of continued inflation dampened those hopes.
The ongoing war between Israel and Hamas is also weighing on market sentiment, as investors worry about the possibility of more conflict in the region.
Why is inflation important?
So what does this have to do with our top 5 AI stocks? The biggest problem is that companies are unlikely to expand or adopt next-generation technologies such as generative AI. As a result, borrowing costs are rising.
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C3.ai creates plug-and-play AI software models for enterprises. With inflation remaining high, businesses are unlikely to incur additional costs.
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Intel makes semiconductors that help power data centers and AI systems, but these too are likely to be slow to take off.
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AMD's graphics processing units (GPUs) are key components that facilitate the training and deployment of AI systems. These processors are expensive, at tens of thousands of dollars or more, so companies are likely to delay deployment while borrowing costs are high.
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Micron Technology provides flash memory and storage systems that speed up AI processing, so it will also be affected by rising interest rates.
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Taiwan Semiconductor Manufacturing, commonly referred to as TSM, is the foundry that makes many of these AI chips possible, so delays in AI adoption will also reduce semiconductor sales.
These issues aside, some company-specific news mixed in made things even more confusing.
american bank Analyst Vivek Arya maintained a neutral (hold) rating on Intel stock and lowered his price target to $44. This represents a 17% upside potential compared to Thursday's closing price. The analyst cited disappointing results from Intel's foundry division as the reason for the increased pessimism.
There was also a report from Cleveland Research that suggested Intel. May It is losing market share in the PC and server markets. There are also reports that China has told telecom companies to start phasing out the use of foreign processors, which, if true, could have a direct impact on Intel and AMD.
Micron has not yet fully restarted production of its dynamic random access memory (DRAM) processors, so the earthquake in Taiwan earlier this month could weigh on its results this quarter. but, city Analyst Christopher Daenley believes this could be a positive for Micron, as reduced supply leads to higher prices, noting that the revenue decline is temporary. There is.
Overall rating
From a valuation perspective, stocks in this group are a mixed bag. Currently, the forward sales of AMD, C3.ai, TSM, Micron, and Intel are 8x, 7x, 7x, 4x, and 2x, respectively, making Intel the most attractive. When measured using a forward price-to-earnings ratio (PEG) that takes into account the companies' current growth trajectories, TSM, AMD, and Intel's multiples are less than 1, which is the standard for undervalued stocks.
I'm not a fan of Intel. That's because the company has been mired in a years-long restructuring and has yet to prove whether its efforts will be successful. Of the stocks presented, I believe TMS and Micron offer the most upside potential as they play the pick-and-shovel role of the AI revolution.
Generative AI still has a long way to go, and the opportunities remain enormous. However, even though the overall trajectory is likely to remain upward, investors should prepare for significant volatility ahead.
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Citigroup is an advertising partner of The Motley Fool's Ascent. Bank of America is an advertising partner of The Motley Fool's Ascent. Danny Vena has no position in any stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Bank of America, and Taiwan Semiconductor Manufacturing. The Motley Fool endorses his C3.ai and Intel and recommends the following options: His January 2023 $57.50 long call on Intel, his January 2025 $45 long call on Intel, and his May 2024 $47 short call on Intel. The Motley Fool has a disclosure policy.
Originally published by The Motley Fool Why C3.ai, Intel, Advanced Micro Devices and other artificial intelligence (AI) stocks fell sharply on Friday.
